Air Canada eliminates $3.7-billion pension deficit, reports small surplus at start of 2014

Air Canada said Wednesday it had finally got a hold on its massive pension obligations, and that at the start of 2014 it estimated its employee’s plan was actually in a small surplus position for the first time in years.

As a result, the country’s largest carrier said it might voluntarily exit an agreement it reached last year with the federal government and its employees that capped its pension funding obligations through to the end of 2020, as well as its management’s wages and bonuses and its payout to shareholders throughout its seven-year term.

Air Canada said it doesn’t expect to make a decision on whether to exit the agreement until sometime after 2014.

Putting Air Canada’s pension plan in the black has been no small feat. The carrier’s pension solvency deficit hit an estimated $4.4-billion at the start of 2012, primarily due to persistently low interest rates and poorly performing equity markets.

Air Canada’s soaring pension obligations saw management reach out to the federal government and its employees for relief.

In March 2013, Ottawa announced an arrangement whereby Air Canada would be required to contribute at least $150-million a year to its employees’ pension plan annually through to the end of 2020. But that at end of the seven-year term, at least $1.4-billion had to be contributed to the plan.

There were strings attached, however, including that executive compensation had to be frozen at the rate of inflation, special bonuses were prohibited and limits were imposed on the executive incentive plans. The airline was also prohibited from issuing dividends and initiating share buybacks for shareholders throughout the term of the arrangement, in addition to other constraints.

“Air Canada may elect to opt out of the 2014 Regulations under certain circumstances,” the airline said in a statement Wednesday.

The carrier said it would consider doing so when its annual contributions to the pension plan would be less than $200-million annually, based on normal funding rules.

“This would result in up to $200-million per year becoming available to Air Canada for other shareholder value enhancing initiatives,” the airline said.

But the airline said it “does not expect to opt out of the new pension regulations in 2014.”

There have been several factors that have contributed to the elimination of Air Canada’s solvency deficit, which sat at $3.7-billion at the start of 2013, not the least of these has been a rise in the discount rate that calculates what is owed.

Air Canada said the discount rate rose to 3.9% this year from 3% in 2013. For every 10 basis point rise in the discount rate, Air Canada said results in $150-million change in the solvency liability, translating into $1.35-billion in savings.

This comes in addition to the $970-milllion in saving it saw from the implementation of previously disclosed changes to its pension benefits, including moving new hires into a hybrid defined benefit/contribution pension plan that was part of its contract negotiations in 2012.

The carrier said it also contributed $225-million to the plan over the last year.

“Air Canada’s three primary pension objectives are to ensure our employees’ and retirees’ pensions are secure, the pension solvency deficit is eliminated and that the costs associated with maintaining the pension plans remain affordable, predictable and stable,” said Calin Rovinescu, Air Canada chief executive, in a statement. “We have, over the past four years, made significant progress on all these objectives”.

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